IMF Executive Board Concludes 2016 Article IV Consultation on Euro Area Policies

07 July 2016

The recovery has strengthened recently. However, inflation and inflation expectations remain very low. Euro area GDP growth is expected to decelerate to 1.4 percent in 2017, mainly due to the negative impact of the UK referendum outcome.

KEY ISSUES

Context.

The recovery continues with stronger growth in recent quarters, but downside risks have increased, amid growing political divisions and euroskepticism. Medium-term prospects remain weak, with high public and private debt and slow progress in structural reforms weighing on growth. And there is very little policy space to cope with adverse shocks.

Policies.

The euro area is at a critical juncture. Without more decisive actions to boost growth and strengthen the monetary union, the euro area remains at risk of instability and repeated crises of confidence. Boosting growth and rebuilding buffers will require a comprehensive set of policies:

• Prioritize structural reforms and their governance. Stronger enforcement and the introduction of outcome-based benchmarks would help better incentivize structural reforms. Product and labor market reforms that support near-term demand, such as reducing business entry barriers and shrinking the labor-tax wedge, should be prioritized. 
• Promote investment and improve fiscal governance. With national fiscal space limited in many countries, centralized investment schemes should be expanded. Countries with fiscal space should use it to promote investment and structural reforms, while stronger enforcement of the fiscal rules would bolster the framework’s credibility and rebuild buffers. Greater compliance is crucial for building support for risk sharing and further integration. 
• Maintain monetary easing to boost inflation. The ECB’s monetary easing has improved financial conditions and expanded credit. The ECB should maintain its accommodative stance and stand ready to ease further if inflation remains below its anticipated adjustment path. 
• Complete the banking union and repair balance sheets. A common deposit insurance scheme and a fiscal backstop for the banking union remain essential. Greater risk sharing should proceed hand in hand with reducing banking sector risks, including measures to accelerate non-performing loan resolution. Faster progress towards a capital markets union would promote greater private risk sharing.

Full report

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